Investor communications – a continuing challenge

July 2017 | PROFESSIONAL INSIGHT | PRIVATE EQUITY

Financier Worldwide Magazine

July 2017 Issue

Enthusiasm for private equity (PE) continues to rise in an exciting time for GPs. 2017 Preqin figures show that 84 percent of LPs surveyed had a positive impression of PE, and that a huge 95 percent believe that their PE portfolios have met or exceeded performance expectations and nearly half (48 percent) are looking to increase their allocation.

This enthusiasm can be easily explained. The macroeconomic environment continues to be characterised by volatility and a paucity of yield when it comes to more traditional asset classes. Not only does PE allow institutional investors to invest in ‘real’ assets that they can see and understand, it also clearly delivers better returns than other asset classes over the long term. It offers pension funds an attractive alternative at a time when they are under pressure to generate increased returns for members.

The appeal can be seen in the data. As of June 2015, $189bn had been returned to investors from funds, compared with $117bn from capital calls. This continues the momentum from 2014 when $475bn was distributed, contrasted with just $294bn called up from LPs.

The transparency problem

However, the good news comes alongside a growing challenge for industry in terms of how GPs communicate with their LPs. LPs’ lives are becoming more complex for a host of reasons as they face increased demands from their own investors and members, as well as, of course, regulators. Post-2008 we live in an era where transparency is the watchword: everyone wants more data, more granular information and to know precisely what is going on.

Alongside this, regulatory transparency has exposed issues relating to fees and expenses charged by PE funds, with the old ‘two and 20’ model coming under increasing attack, putting investors ‘on notice’ when it comes to securing value for their allocations. This means GPs have to go the extra mile in order to demonstrate ‘bang for buck’ and secure big ticket investments.

Ultimately, the pressure to better manage their asset allocations leaves LPs needing a deeper understanding of valuations, and the reasoning behind the valuation multiples of each investment. Traditional reporting, wherein GPs send quarterly updates on the value of LPs’ investments, is no longer enough. Institutional investors need far more granular detail on the workings of the fund, which companies are faring well and which are not – not just one simple figure.

Change is not easy

Not only are GPs having to provide more information, but LPs are having to develop their own operating models to absorb and effectively utilise the data. But this is never easy. The crux of the issue is that LPs need to know more about their investments than ever before, to better understand the nuances of performance and the worthiness of GP fees.

Trade bodies, such as ILPA and AltExchange, have been working on an industry-wide reporting standard requiring more detailed exposure of fees and expenses incurred by funds. There are clear arguments in favour of this; standardisation would ensure that the information GPs share comes in a more useful and interchangeable format – saving time and creating efficiency.

But standardisation, while a welcome development, is no panacea. It does not address some of the key challenges at play, as well as all of the evolving needs of LPs. No matter what progress standardisation makes, LPs continue to request additional information suited to their particular needs, and in other formats (often spreadsheets) that work with their systems. This gets to the crux of the issue: standardisation makes everything the same, but LPs actually vary a lot in terms of what specific information they need, and in what precise form.

GPs themselves are being asked to provide much more information and data – on portfolio companies and fees and charges to name just a few. This means that the information and data needs to be collected in the first instance and then made readily available within systems to provide the analysis required by the LPs. There are often information gaps resulting in the request of additional information from LPs – and responding takes time and expertise away from the business of managing the fund.

Added to this is an issue of formatting. GPs often present data back in PDF documents which provide little value to data-hungry LPs. However, some LPs circulate their own files for completion by the GP, which allow for automated mapping into LP systems, but there is little consistency, and GPs are reluctant to go down this route given the time and effort involved to complete.

In addition, some LPs’ own internal systems and resources lack the capability to fully meet the new requirements, requiring either labour-intensive workarounds or substantial investments in new technology – investment that may not be readily available when everyone is under pressure to cut costs.

What is the way forward?

Given the various restraints on costs and resources, LPs are increasingly turning to alternative solutions. They need the systems and resources to enable them to process data and information on a daily basis but given the current economic climate, they are more likely to turn to professionals within the industry for assistance.

And it is the same story with GPs, who are continuing to look to third-party providers to provide both the technology and resources to meet the ever-increasing demands of their LPs.

Plugged in, as they are, to a wealth of client and portfolio data, coupled with a preoccupation with detail, fund administrators are well-placed and have the right mentality to collect the data required, and provide the detailed analysis required by LPs. Output can be delivered to the depth and frequency demanded – meeting the specific and individual needs of LPs.

Ian Kelly is chief executive officer of Augentius.

Ian Kelly

Augentius